By Logan Mohtashami
Today’s strong housing start numbers sparked the same rabid fascination from pundits, as a dog jumping into a pool after a tennis ball. We first hear that this is the strongest report we have had in the past few years then the discussion degrades into that same sad song that tight lending is holding housing back. The usual refrain of excuses for why housing “isn’t what it could be” is given by people who don’t understand that main street America simply doesn’t have the income in this cycle to have a Nirvana-like recovery.
The responsible economist feels compelled to remind them how soft this recovery actually is.
Four new charts from Doug Short bring some perspective to the discussion.
When one considers the epic crash in new home sales and starts that occurred after the housing bubble burst, you might assume that by now we would see more velocity to the upside in total activity. But this does not account for the fact that we simply won’t have enough quality home buyers at this point in the economic cycle to have a real recovery. This is true for new home sales as well, which are typically sold to the more well-to-do buyer and make up only 1/10th of all home sales in this cycle, usually 1/6th. Some of those buyers are finding better value in existing homes.
The problem with the builders is simple. New homes are very expensive because they’re big. The metric of Median Income to Median Price homes has deviated too much for main street to afford the debt of a new home (or any home in most cases) if we are looking for strong housing demand recovery.This is the reason why new home sales trend have been soft in a 90% mortgage marketplace that is tilted to the more wealthy buyer once you adjust it to population growth.
Why would the first-time home buyer even look at a new home which is much more expensive than a existing home coming into the market. For a while builders had the advantage of low existing inventory but now more existing homes are cominginto the market, increasing the competition for housing dollars.
With that said, year over year growth in new homes sales, starts and permits are expected because previous numbers were so soft 2014. But don’t let growth from historic lows blind you to the fact that, thus far, this has been the weakest housing recovery in American history. It’s all about incomes and assets, and the lack there of, not tight lending.